1. A number of researchers have studied the effects that the EITC has on motivat
ID: 1124816 • Letter: 1
Question
1. A number of researchers have studied the effects that the EITC has on motivating more people to work (extensive margin) and on the hours worked among low-income recipients. The research results consistently find that the EITC increases labor force participation among those who previously did not work and does not discourage hours worked among those already in the workforce. Are these findings consistent with what might be expected by the theory on how the EITC might affect labor force participation and the number of hours worked?
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Thorough answer please
Explanation / Answer
EITC stands for Earned Income Tax Credit which encourages the people to take up more jobs and employment as their incidence of tax reduces.
EITC is meant to supplement the wage income of poor families with dependent child. The idea behind the EITC was simple: reward the poor for working, thus encouragin them to work more and acquire more skills. In 1993, EITC was greatly expanded and indexed, so that in 1997, the maximum benefit for a family with two or more eligible children, of $3635 phased out over the range of $11,950 to $29,290, implying a marginal tax rate of 22% from EITC. When the Clinton administration took office, it hoped to expand EITC so taht all those working full-time would be out of poverty. But the overriding desire to reduce the deficit led to a lower maximum benefit than was required to achieve this goal. Fiscal constraints forced a shorter phase out range, thus leading to marginal disincentives.
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